A bank that holds tokens for a client holds the keys, and the client holds a claim

A bank that holds tokens for a client holds two things: the private keys that control addresses on a ledger, and its own books saying which units at those addresses belong to which client. The client holds a claim on the bank. The Hong Kong Monetary Authority (HKMA) asks banks to protect the keys with hardware, split control so no one person can move assets, keep most client assets offline, and segregate them so the bank’s creditors cannot reach them if the bank fails (HKMA guidance, 27 May 2026, paras 6 and 11). The key controls stop theft. Only segregation and the legal terms decide whether the client gets the assets back from a failed bank.

The problem

On 27 May 2026 the HKMA updated its expected standards for authorised institutions, and subsidiaries of locally incorporated ones, that hold digital assets for clients. The guidance covers crypto assets, tokenised securities and other tokenised assets, and excludes the bank’s own holdings (Wire). On the same day the Securities and Futures Commission (SFC) and the HKMA let banks and brokers hold clients’ licensed stablecoins through segregated accounts with the licensed issuer (Wire).

Custody is also where tokenised funds and bonds end up. In Hong Kong’s tokenised money market fund classes, a trustee or custodian approves minting and keeps the register (pilot entry). The Chief Executive’s 2026 Policy Address says the SFC will start a digital-asset custody surveillance system in the second half of 2026 (Wire). The question for a bank’s operations and risk teams, and for the supervisor who inspects them, is what exactly the bank is holding and where it can fail.

How it works

Some terms first. A ledger is a record of who holds what; a blockchain such as Ethereum is a ledger that many computers keep together. An address is an account on that ledger. On Ethereum an ordinary account “is made up of a pair of cryptographic keys: public and private”, and “You need a private key to sign messages and transactions” (ethereum.org: accounts). Whoever holds the private key can move what sits at the address. A wallet is the software or device that holds keys and signs with them. A hot wallet is connected to the internet; a cold wallet is not. Custody is holding assets for someone else. Segregation means keeping a client’s assets apart from the custodian’s own, in records and, on a ledger, at separate addresses.

DBS describes its own service in these terms: “DBS’ digital custody services provides the custody of cryptographic keys that control digital assets on behalf of clients” (DBS release, 10 December 2020).

Follow a corporate client of Sample Bank Hong Kong that deposits ether with the bank and later withdraws it. Ether is a virtual asset under the HKMA guidance, so the full set of controls applies (para 11).

One deposit and one withdrawal at a bank custodian

The ledger records only addresses and amounts. Which client owns what is in the bank's books. Numbers match the steps below.

ClientOwns the ether
Sample BankClient records
Sample BankKeys and signers
EthereumPublic ledger

1Sample Bank: Generates keys in an HSM, in Hong Kong
From Client to Sample Bank: Proves it owns its walletMessage signing or a micropayment; the address is whitelisted
2From Client to Ethereum: Sends etherTo a client address, separate from the bank's own
From Ethereum to Sample Bank: Deposit seen onchain
Sample Bank: Credits the client's account
3From Sample Bank to Ethereum: Moves most of it to cold storage
4Sample Bank: Reconciles books with the ledger, client by client
5From Client to Sample Bank: Withdrawal instructionTo its whitelisted address
From Sample Bank to Sample Bank: Transaction for approvalReadable details, several approvers, air-gapped devices
6From Sample Bank to Ethereum: Signed transferFrom the bank's address to the client's
From Ethereum to Client: Ether arrives

Encrypted message between the firms, offchain
Transaction on the blockchain

Source: HKMA, Updated Guidance on Expected Standards on Provision of Custodial Services for Digital Assets by Authorized Institutions, 27 May 2026The Monsoon Ledger

The bank creates the keys. Sample Bank generates and stores the seeds and private keys, and their backups, “in secure and tamper-resistant environment and devices, such as hardware security module (‘HSM’)”, offline where practicable (HKMA guidance, para 11(a)). A hardware security module is a device built to hold keys and sign without letting the key out; the United States standard FIPS 140-3 sets four levels of security requirements for such cryptographic modules (NIST FIPS 140-3). The keys are generated, stored and backed up in Hong Kong (para 11(b)). Before accepting a deposit, the bank confirms that the client’s own wallet belongs to the client, “e.g. through proof of ownership test, such as message signing or micropayment test”, and whitelists that address (para 11(m)).
The client deposits. The client sends ether from its whitelisted wallet to an address the bank uses only for client assets. The HKMA asks banks to hold client digital assets in separate client accounts, including wallet addresses, “segregated from the AI’s own assets” (para 6 and footnote 6). The ledger shows ether arriving at a bank-controlled address. It does not show that the ether belongs to this client. Sample Bank’s books record that.
Most of it goes offline. The bank keeps “a substantial portion of client digital assets in cold storage unconnected to the internet” (para 11(l)), and for virtual assets “should store 98% of the client digital assets in cold storage” (footnote 8). Cold wallets should not include smart contracts on public blockchains (para 11(c)). Approvals for cold wallet transactions are made on dedicated, air-gapped devices, which are never connected to a network (para 11(g)).
The books are checked against the chain. The bank keeps records for each client of the amount and kind of assets it owes, and reconciles them “on a client-by-client basis” against offchain and onchain records, escalating any discrepancy (para 21). The SFC asks licensed trading platforms for “real-time reconciliation of on-chain client assets with the ledger balance” (SFC circular, 15 August 2025, para 19).
The client asks for its ether back. The client instructs a withdrawal to its whitelisted address. Withdrawals go only to whitelisted addresses that belong to clients, with exceptions for payment services and settlement instructions (HKMA guidance, para 11(m)). No single person can approve it: the bank uses “key sharding or similar technology to split and distribute a private key among multiple personnel”, and “Robust measures should be implemented to prevent blind signing”, meaning approvers must see what they are signing (para 11(i)). Key holders must not be able to collude (para 11(j)).
The bank signs and the ledger moves the ether. The approved transaction is signed with the private key and sent to Ethereum. The ledger records a transfer from the bank’s address to the client’s. Sample Bank debits the client in its books. The client again holds its own key.

Splitting control of a key

Step 5 can be built in more than one way. In one design the whole key sits inside an HSM, and the bank’s procedures decide who may ask the HSM to sign. In another, threshold cryptography divides the work of signing among several parties. The United States National Institute of Standards and Technology (NIST) describes threshold schemes as ones where “multiple components contribute to the operation” so that the security goals hold “even if f out of n of its components are compromised”, and lists “the secrecy of cryptographic keys” among those goals (NIST IR 8214). Threshold schemes “apply principles of secure multiparty computation (MPC)” (NIST threshold cryptography project). The HKMA guidance names HSMs and key sharding. It does not name multi-party computation. A third design, a multi-signature wallet, puts the approval rule in a smart contract on the chain; for cold wallets the HKMA guidance rules that out (para 11(c)).

The SFC warned in August 2025 that none of these designs is enough on its own. Overseas platforms had lost assets because attackers injected malicious code into a third-party wallet solution, reached approval devices, and got signers to approve forged transactions “without verifying the approval content”. The SFC said the weaknesses applied “regardless of the custody solutions used, such as Hardware Security Modules (HSMs), Multi-Party Computation (MPC), or Multi-Signature (Multi-Sig)” (SFC circular, 15 August 2025, Background).

If the bank fails

Change one fact: Sample Bank enters insolvency. The ether is still at the client address, and the bank’s books still say whose it is. The client’s position now turns on the law. The HKMA’s segregation rule exists so that client assets are “protected from claims of the AI’s creditors in the event of an insolvency or resolution of the AI” (HKMA guidance, para 6), and banks must tell clients their “rights of ownership to their assets in the event of the AI entering insolvency or resolution” (para 20).

The liquidation of Gatecoin, a Hong Kong crypto exchange, shows what the terms decide. The Court of First Instance held that “Cryptocurrency is ‘property’ and is capable of being held on trust”. It then found that under Gatecoin’s 2018 terms, which removed the earlier trust language and stated that Gatecoin did not act in a fiduciary capacity, the currencies “are not held by Gatecoin on trust for the Customers” (Re Gatecoin Ltd [2023] HKCFI 914, paras 42, 71 and 82). Customers on those terms had no claim to specific assets. The Singapore High Court reached the same view of property: “Like any other thing in action, USDT is capable of being held on trust” (ByBit Fintech Ltd v Ho Kai Xin [2023] SGHC 199, para 4).

Why it is built this way

Regulators treat the key as the asset. Whoever holds the key can move the asset. Most of the HKMA’s controls therefore sit around key generation, storage and signing (para 11), and the SFC traced the overseas losses it described in August 2025 to “vulnerabilities in wallet systems and their associated controls” (SFC circular, Background). The HKMA lets banks lighten controls for some assets. It says that client assets “held as permissioned tokens with access controls on the smart contract” may enable recovery of lost assets, and allows a risk-based approach by type of network (para 9).

Cold storage trades speed for safety. Assets offline cannot be taken by a remote attacker, but every withdrawal from cold storage needs offline approvals. Hong Kong’s figure for virtual assets is 98% (HKMA guidance, footnote 8). Singapore’s guidelines for licensed digital payment token service providers set at least 90% (MAS Guidelines PS-G03, para 3.4.4). The International Organization of Securities Commissions (IOSCO) sets no figure, and asks firms to account for different wallet types (IOSCO, Policy Recommendations for Crypto and Digital Asset Markets, November 2023, Recommendations 12 and 16).

Segregation answers the bank’s insolvency. It protects the client from the bank’s creditors. IOSCO asks regulators to require firms to “place Client Assets in trust, or to otherwise segregate them”, and warns that laws and court decisions in some jurisdictions “might not yet have evolved” to give certainty (Recommendation 13). Singapore states the purpose as to “facilitate the return of customers’ assets in the event of the DPT service provider’s insolvency” (MAS Guidelines PS-G03, para 3.1.2).

Keys stay where the supervisor can reach them. The HKMA asks for keys to be generated, stored and backed up in Hong Kong (HKMA guidance, para 11(b)), and limits delegation of virtual asset custody to another authorised institution, an SFC-licensed trading platform, or a licensed stablecoin issuer with HKMA consent (para 14). Responsibility for anything delegated stays with the bank (para 19). I read the location rule as mainly protecting clients. Segregation and the trust terms decide whether a client owns specific assets when a bank fails (paras 6 and 20), but someone still has to take control of the devices that can move those assets. With the keys in Hong Kong, the HSMs, the backups and the people who sign all sit within reach of a Hong Kong liquidator and the Hong Kong courts, which have already decided who owns crypto in a liquidation (Re Gatecoin Ltd [2023] HKCFI 914). Keys held abroad would put a foreign court and foreign staff between that judgment and the client’s ether. The terms still decide whether the client has a claim; the location rule decides whether the claim can be made good. The guidance gives no reason for para 11(b), so this is my reading of it, and the same rule also gives the HKMA reach over the devices. An HKMA statement of reasons, or its answer to the first request to hold keys outside Hong Kong, would show which purpose it weighs most.

In our markets

India has no rule on banks holding crypto for clients and has not implemented the Basel cryptoasset standard (State of Play). Providers that safekeep virtual digital assets must register with the Financial Intelligence Unit (FIU-IND), and registration carries anti-money laundering duties, not custody rules (State of Play). Tokenised bonds in India sit inside the depositories: under Demat 2.0, investors hold the tokens in their existing demat accounts on a ledger the depositories own (Wire).

Singapore licenses safekeeping of digital payment tokens under the Payment Services Act 2019 (State of Play). Its guidelines for licensed providers require a statutory trust for customers’ assets, kept apart from the provider’s own, with the option of appointing another person to hold them (MAS Guidelines PS-G03, paras 3.1.2, 3.2.1 and 3.2.3). No individual may on their own authorise a movement of customers’ assets (para 3.4.2(a)), at least 90% must be in cold storage (para 3.4.4), and the provider discloses its storage policy (para 3.4.6). The Monetary Authority of Singapore (MAS) has published no custody standard written for banks (State of Play). DBS announced custody of clients’ keys together with its digital exchange in December 2020 (DBS release, 10 December 2020).

Hong Kong has the bank-specific standard described above, with the full control set for virtual assets and a risk-based approach for tokenised securities and other tokenised assets (Wire). Banks may hold clients’ licensed stablecoins in segregated accounts with the issuer itself (Wire). A separate licensing regime for virtual asset custodians, focused on “safekeeping private keys of client VAs in Hong Kong”, is due in a bill in 2026 (FSTB and SFC, 24 December 2025). In tokenised fund classes, custody of the token and the legal record are split: for Bosera’s classes the custodian, as registrar, keeps the offchain register that is the official record (pilot entry), and CSOP says its trustee and registrar keep the official register offchain while a token custodian holds the tokens (pilot entry).

The case against

The bank adds a target and keeps the claim weak. A critic would say that a bank custodian concentrates many clients’ keys in one place, and the SFC’s own list of overseas losses shows that hardware and split keys did not prevent them (SFC circular, Background). The client gets a claim on the bank in return, and IOSCO says that claim depends on “jurisdictional application of custody and trust arrangements” (IOSCO, Recommendation 12). Gatecoin’s customers learned that the terms they signed could leave them unsecured creditors (Re Gatecoin, para 82). The alternative on this view is for an institutional client to hold its own keys and use the bank only for trading. The HKMA’s withdrawal whitelist and ownership tests already assume the client has a wallet of its own (HKMA guidance, para 11(m)).

A specialist custodian could do it better. The HKMA lets a bank delegate virtual asset custody only to another authorised institution, an SFC-licensed platform or a licensed stablecoin issuer (para 14), and MAS lets a provider appoint another person to hold the trust account (MAS Guidelines PS-G03, para 3.2.1). A third-party custodian spreads fixed costs of HSMs, monitoring and drills across many banks. The cost is a new dependency, which the HKMA answers by keeping responsibility with the bank (HKMA guidance, para 19).

The non-ledger alternative is to make the token a record. Where a depository or registrar keeps the legal record, as in Demat 2.0 (Wire) and Hong Kong’s tokenised fund classes (pilot entry), losing a key loses a copy, and ownership can be restored from the register. The HKMA’s para 9 makes the same point for permissioned tokens. CMU OmniClear’s planned digital asset platform would keep digital bonds inside Hong Kong’s central securities depository (Wire). This works only for assets with an issuer or registrar. Ether and bitcoin have none, so for them the key is the only record of control.

I think a bank’s own key custody is worth its cost only for assets with no issuer, such as ether. For a tokenised fund, a bond or a licensed stablecoin, a register or the issuer can restore ownership, so a depository, the fund’s registrar, or a segregated account with the issuer gives the client more protection for less. The SFC and HKMA opened that last route for licensed stablecoins in May (Wire). A bank that holds keys for those assets pays for HSMs, cold storage and drills to protect something the register already protects. This cuts against the HKMA’s single standard, which expects banks to hold tokenised securities and other tokenised assets too, and it leaves banks less reason to build that capability. No Hong Kong or Singapore bank has published what its clients ask it to hold, so this is a judgement about cost, not a finding about demand. Whether banks hold digital bonds through CMU OmniClear, and stablecoins with their issuers, rather than with their own keys, will test it.

For Ethereum

The HKMA says a bank’s “cold wallet implementations should not include smart contracts on public blockchains to minimise potential online attack vectors associated with on-chain smart contracts” (HKMA guidance, para 11(c)). The SFC sets the same rule, in the same words, for licensed virtual asset trading platforms and their associated entities (SFC circular, para 5). The SFC rule does not bind banks. On Ethereum, a smart contract wallet is a contract account, which has no private key and is “controlled by the logic of the smart contract code” (ethereum.org: accounts). Under the HKMA rule, a Hong Kong bank’s cold storage for ether uses ordinary key-controlled accounts, with multi-approval enforced offchain by HSM procedures or split keys, and not an onchain multi-signature contract. This is a reading of the HKMA text, which names no contract design.

Tokens with issuer controls get easier treatment. The HKMA’s para 9 contrasts permissioned tokens with access controls in the contract, which “may enable recovery of lost assets”, with permissionless tokens on public permissionless networks, and para 14 asks for extra caution before outsourcing custody of the latter. A tokenised fund or a licensed stablecoin on Ethereum with a whitelist and freeze function, such as those described in an earlier piece, is the easier asset for a Hong Kong bank to hold. Ether is the harder one.

I think the rule is neutral for Ethereum and a setback for contract wallets. Ether itself still moves on Ethereum, and the rule shapes only the custody wrapper, which is offchain. The regulators’ reason, fewer online attack routes, is a fair one, and the HKMA’s next paragraph shows contracts carry risks of their own: any smart contract used in custody must be “not subject to any contract vulnerabilities or security flaws to a high level of confidence” (HKMA guidance, para 11(d)). Para 11(c) keeps the wrapper in offchain key designs, HSMs and split keys, and away from the controls a contract wallet can enforce onchain: a multi-approval rule that sits on the ledger where anyone can inspect it, and recovery written into the wallet. It does not address the weakness the SFC describes in the overseas losses, where signers approved forged transactions whatever the design, HSMs and MPC included (SFC circular, Background). Para 11(d) already sets the bar a contract would have to clear, so a ban in cold storage goes further than the stated risk needs. With 98% of client virtual assets meant to sit in cold storage (HKMA guidance, footnote 8), Hong Kong’s most closely supervised custodians will hold most of their clients’ ether without contract wallets, and will not be the ones to test them at scale. Whether the HKMA or SFC revisits para 11(c) or para 5, or a licensed custodian publishes a design that uses contract wallets for warm storage, will show whether the rule hardens or softens.

What to watch

2026: the Hong Kong bill for the virtual asset custodian regime (FSTB and SFC), and whether it applies to banks or leaves them under the HKMA guidance.
Second half of 2026: the start of the SFC’s digital-asset custody surveillance system (Wire).
Whether MAS publishes custody expectations for banks, alongside its interim treatment of bank crypto exposure (State of Play).
The first Hong Kong bank to hold a licensed stablecoin for clients in a segregated account with the issuer, under the May 2026 circulars.
CMU OmniClear’s digital asset platform, and whether banks hold digital bonds through it rather than with their own keys (Wire).